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Innovative Islamic Social Finance Muhammad Didi Hardiana Team Leader – Innovative Financing Lab UNDP Indonesia
Innovative Islamic Social Finance
Muhammad Didi Hardiana
Team Leader – Innovative Financing Lab
UNDP Indonesia
On the ground in about 170 countries
and territories, UNDP works to eradicate
poverty while protecting the planet. We
help countries develop strong policies,
skills, partnerships, and institutions so
they can sustain their progress.
2
United Nations Development Programme
GlobalCountry
Level
Indonesia
Context
• SDGs requires additional
investment of $5-7 tn per
year up to 2030 (ICESDF).
• Developing countries needs
$3.3-4.5 tn per year
(UNCTAD).
• Financing shortfall of about
$2.5 tn (World Investment
Report 2014 – Investing in
the SDGs).
Government alone cannot
be responsible for domestic
financing, leaving
opportunity for increased
and more effective
philanthropic giving and
social finance.
Domestic public and private
investment accounts for
more than half of all
financing for development.
SDGs Financing: Problem or trillion $ opportunity?
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-
2,000
4,000
6,000
8,000
10,000
12,000
2005 2007 2009 2011 2013 2015 2017
USD
bill
ion
s, c
on
stan
t 2
01
6 p
rice
s
Domestic public Domestic private International public International private
Global Financing Trends
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Financing mix in Asia-
Pacific as a whole Financing mix in Asia-Pacific
LDCs
32.2%
40.3%
9.3%
18.3%
43.6%
48.7%
0.4%
7.3%
Asia-Pacific Financing Trends
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Source: BAPPENAS (2018), Preliminary analysis for draft of RPJMN 2019-2024.
Source: Indonesia’s Development Assessment (DFA) supported by UNDP
Indonesia Financing Trends
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Unlock the untapped potentialof non-government sources.
Source: UNDP. Financing the SDGs in ASEAN, and Linking resources with sustainable development results in Indonesia: an Integrated National Financing Framework.
The need for a coordinated approach in creating a
conducive ecosystem for SGDs funding.
The need for a shared platform for dialogue with non-state actors (business, civil society, development
partners and others).
The need for innovative financing schemes.
The need to link private investment to SDGs.
How to Close the Financing Gap?
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Innovative Financing Lab
UNDP Indonesia
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SDGs Country Platform
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The innovative financing lab focuses on how to attract, channel and direct private and Islamic
finance for development - including from philanthropy, private investors and religious
organizations
It also places emphasis on how such alternative finance is contributing towards the SDGs:
helping to measure and finance the SDGs and the impact of such investments
Financial
Literacy
Program
Innovative
Finance
Policy
Impac
Investment
FundINSTRUMENT
POLICY
KNOWLEDGE
IFL in Supporting Islamic Finance for SDGs
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ISLAMIC FINANCE
BLENDED FINANCE
GREEN & BLUE FINANCE
IMPACT INVESTMENT
PUBLIC CLIMATE FINANCE
YOUTH ENTREPRENEURSHIP
INITIATIVE
CROWDFUNDING
IMPACT ACCELERATOR
SDG IMPACT FUND
SOCIAL IMPACT BOND
GREEN SUKUK
BLUE FINANCE
FRAMEWORKGREEN BOND
ZAKAT FOR SDGS
WAQF BLOCKCHAIN
CLIMATE BUDGET TAGGING CLIMATE CHANGE FISCAL FRAMEWORK
SDG FINANCING HUB
SDG INDONESIA ONE
CSR
YOUTH CO:LAB
IDEATHONESIA NATIONAL DIALOGUE
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Assets expected to exceed $3 trillion by 2020.
Annual Islamic finance industry expansion 10-12%.
Embodies socially responsible & sustainable development.
Engaging with religious organisations crucial for peace,
development, promoting tolerance.
Why Islamic Finance?
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According to Charity Aid Foundation, Indonesia is one among two countries with
the highest proportion of people donating money (2016-2018) and being the only
developing country out of the seven most generous countries in the world (2018).
Charitable Giving Phenomenon
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Maqasid Sharia (MS) is very
systematic and it attempts to
address human welfare and
wellbeing in a comprehensive
way in a systemic manner.
17 SDGs are important for the
world community and for the
Muslims as well because:
• They are good in
themselves.
• Not in direct conflict with
Islamic percepts.
• Have been agreed by world
community in general.
Commonalities between SDGs and Maqasid Sharia
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Initial liftHelp people move beyond survival to security & growth
Revolving fund for the micro-
entreprises; investment in waqf
land
Promote inclusive, sutainable
economic growth
ZakatIslamic
MicrofinanceCash &
land WaqfSukuk
Complementarity of Islamic Finance
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UNDP partners with Baznas to leverage
zakat funds (US$350k) for micro-hydro
energy in rural Sumatra in a blended
finance mechanism in 2018. The
collaboration is continued with local
economic development programme.
Zakat for SDGs
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22% of global population is Muslim and
Islamic finance reached an estimated value of
around US$2 trillion in 2015, with assets of
US$3 trillion expected by 2020.
The worldwide value of zakat is potentially
US$200 billion to US$1 trillion annually.
Poor and/or needy (fakir/miskin) received
89.60% of total allocated funds.
ZIS average annual rate (2002-
2016), GDP growth 5.42%.
38.34%
Remaining challenges:
Zakat as a positive measure to
redistribute wealth to prevent
poverty.
Overcoming preference towards
short-term interpersonal
support.
Expanding access to the
unbanked, enhancing
effectiveness of zakat
institutions.
Zakat: Witnessing a paradigm shift
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• In 2017, Indonesia’s Zakat Body, BAZNAS, extends first contribution to
support the SDGs through zakat funds for micro-hydro energy in rural
villages in Sumatra and leverages a UNDP/GEF funded project and
CSR funds from Bank Jambi, a state-owned provincial bank.
• The partnership between UNDP Indonesia and BAZNAS, the national
zakat agency, is groundbreaking because it is the first time that zakat
organization has committed to supporting the SDGs anywhere in the
world.
• Four micro-hydro power plants, which the project built directly benefit
for a total of 803 households (about 4,500 people) from four villages
giving them access to electricity and to likewise bolster rural
livelihoods and increases the economic activities of the communities.
The inauguration of micro hydro power plant
- Lubuk Bangkar, Jambi - 5 September 2018
Blended Finance: Islamic social finance, CSR, global fund
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Islamic microfinance, with interest-free contracts with sources of funds from donation can include zakat, infaq, sadaqa, waqf and hibah. Source of deposit includeswadiah, qard hasan and mudarabah, while sources of equity includes musharakah.
Microfinance can change lifestyles by
offering loans to a group of people who
rely on social collateral.
Microfinance generally charges
high interest rates, even higher
than banks (not accessible for all).
Success Story of Islamic Microfinance
UNDP Success Story of Microfinance
UNDP Nepal established Micro-Enterprise Development Programme (MEDP), creating morethan 119,085 new microenterprises andcontributing to the creation of 187,358 jobs in rural areas since 1998.
73% Of the enterpreneur createdhad moved out of poverty.
Islamic Microfinance: A special opportunity
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UNDP Indonesia is engaging with
Indonesian Waqf Board to develop
waqf digital platform through
blockchain technology with support
from AID:Tech.
Waqf Digital Platform
More
flexible
Long-
term
Income
generation
Waqf land in Indonesia comprising 4,300 sq.km
in 435,768 locations with a value of $27 billion.
Old Paradigm: waqf is only in the form of land
to be built cemetery, mosque, school.
Indonesia Wakaf Summit 2017:
Potential: $12 billion
Collected in 2017: $27 million
Target in 2018: $60 million
Indonesian population 263
million1
Muslim 87% or
230 million2
Middle class
74 million3
1Global Wealth Report 2017. Research Institute. Credit Suisse. November 2017.2Badan Pusat Statistik. Penduduk Menurut Wilayah dan Agama yang Dianut. Sensus Penduduk 20103Boston Consulting Group - Asia’s Next Big Opportunity: Indonesia’s Rising Middle-Class and Affluent
Consumers 2013.
Waqf Spending Horizon
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UNDP has been supporting the Ministry of
Finance’s performance-based budgeting
through climate budget tagging that
culminated in the issuance of first sovereign
Green Sukuk in 2018.
Green Islamic Finance
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In 2018 & 2019, RoI has issued Green Sukuk of
(~IDR 30 trillion)
• The world’s first sovereign green sukuk
• First country to issue green bond/sukuk
twice consecutively
Green bonds market developed quite rapidly in recent years.
Globally there is, up to now, USD1.45 tn climate aligned bonds
with USD389 bn alone in green bond. (CBI, 2018)
SOVEREIGN GREEN BOND CLUB: POLAND, FRANCE, FIJI,
INDONESIA, NIGERIA, BELGIUM
• Sukuk is bonds that comply to Islamic law/securities based on Islamic principles. What is Sukuk?
• Sukuk represents proportionate ownership of an asset, while bonds indicate a debt obligation. In
other words, sukuk is backed with tangible assets not debt.
• The assets that back sukuk are compliant with Sharia.
• The returns of bonds in in the form of interest payments, while returns on Sukuk is periodical
payments -> rent/profit.
How is Sukuk different than
Bond?
• Regulation from the National Islamic Council (DSN MUI) No 01/DSN-MUI/III/2012.How is it being regulated in
Indonesia?
• Innovative financial instruments where the proceeds are invested exclusively to
finance or refinance green projects that generate climate or other environmental
benefits, including mitigation, adaptation and biodiversity. What is Green Bond/Sukuk?
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Indonesia’s Green Sukuk
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LIGHT GREEN
LIGHT TO MEDIUM GREEN
MEDIUM TO DARK GREEN
INDONESIA GREEN
BOND/SUKUK FRAME WORK
Pillar III:Management of
Proceeds
Pillar IV:Reporting
Pillar I:Use of Proceeds
MEDIUM GREEN REVIEW BY CICERO
one of the world’s leading green bond reviewer
Pillar II:Project Evaluation
and Selection
DARK GREEN
Renewable Energy
Resilience to Climate Change for Disaster Risk Areas
Waste to Energy & Waste Management
Sustainable Agriculture
Sustainable Transportation
Green TourismSustainable Management of Natural Resources
Energy EfficiencyGreen Building
4 MAIN PILLARS 9 ELIGIBLE SECTORS
Green Framework
Indonesia’s Green Sukuk (Cont’d)
Use of Proceeds for RoI Green Sukuk 2018 cover five main green eligible sectors.
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Distribution of Investors by Geography
32%
25%
18%
15%
Islamic
Asia
US
Europe
Indonesia 10%
Climate Budget TaggingMechanism
• Selection of eligible green projects through a budget tagging system developed by MoF and UNDP
Green Bond/Sukuk Framework• Assisted by Ministry of Planning,
MOEF, Line Ministries, UNDP andHSBC
• Studied through a series of FGDs with experts / investment banks /issuers of green bonds
2nd Party Review• Labelled medium green from CICERO
PRE ISSUANCE ISSUANCE
Roadshow• Targeting new types of investors
(green investors)• Visiting green investors in Europe
1st Sovereign Green Sukuk Issuance
• March 2018• Total issuance of USD 1.25 billion• 29% green investors
2nd Sovereign Green Sukuk Issuance
• February 2019• Total issuance of USD 750 million• 29% green investors
1st Annual Green Sukuk Impact Report
• February 2019• The preparation was assisted by
Ministry of Planning, MOEF, Technical Line Ministrie1s, UNDP, and the World Bank
Audit Process
• Audited by KPMG
Journey of Indonesia’s Green Sukuk
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Key Highligts on GS Impact Report
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Impact Report has been auditedby KPMG which shows the alignment of whole Green Sukukprocess to the ROI’s Green Framework
The development of Impact report is supported by UNDP and the World Bank Group. The final report is audited by KPMG.
Published in February 2019, less than a year from the issuance date (March 2018).
Allocation of Proceeds from Green Sukuk also promote national target to the SDGs.
How to link Islamic Social Finance to Commercial Side?
Private investment in
energy mobilised by
PPPs
Total energy
investment
$701 bn
Energy
$49 bn
Fund investmentGreen bonds
outstanding, Asia-Pacific
Corporate bonds
outstanding,
ASEAN+3
$5.4 tn
Bonds
$338 bn
WHAT DO WE KNOW?Current Proportion of SDGs Investment
Growth in
pension fund
assets + venture
capital
$906 bn
SDG-aligned private investment is growing,
but remains a small part of the total.
$31 bnImpact
investment
SDG-aligned private investment is growing, but remains a small part of the total.
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Private sector is ready to do
more
“There is no shortage of
capital in the world
economy. The real issue is
that the global financial
system is not channeling
financial flows effectively
towards investments for
Sustainable Development.”
- Achim Steiner
Business Value from Private Sector
Private sector is ready to do more.
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“Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” -GIIN
Impact Investing
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Impact as Objective
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Responsible Investments
/ Sustainable
Investments
Impact investments
Value alignment
Shareholder value
Impact objective
Stakeholder value
• Comprehensive Impact Measurement and Management framework
• Impact metrics set in line with a major global benchmark targets -
SDGs
• Focus on understanding and enhancing impact across several
areas and multiple stakeholders of various ecosystems
• Lean impact measurement and management system to navigate a
startups towards a sustainable business model
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Impact Investment – Stages of Business Development
• A high potential market.
• USD 148.8 Million across 58 deals from private investors (2018).
• Increasingly favourable policy landscape.
• Investment law (25/2007).
• Micro Small and Medium Enterprise Law (20/2008).
• Islamic Finance e.g. Zakat is 4% of GDP.
But….
• 70% MSMEs face financial barriers to revenue growth.
• Need mechanism for pooling and fund management for philanthropic giving.
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Impact Investing in Indonesia
Source: UNDP illustration based on Bridges Ventures and AVCA, 2014.
The Impact Investment Value Chain Doing good and avoiding harm.
Claims
No trade-off betweenfinancial gains & value creation
Profit with Purpose Investing
Attaining business goals in a way to benefit the society as a whole
Business-SocietyRelations
Integrating disadvantaged & the poor that don’t use formal financial services
Financial Inclusion
Islamic Finance and Impact Investing share common principles:
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Islamic Finance & Impact Investing: Common principles
Youth Entre-preneurship Initiative
UNDP Impact Accelerator
SDG Impact Fund
Incubator for very early stage
start-ups. Youth Co:Lab, co-lead
by UNDP and Citi Foundation, is
an incubator for youth who
have interest in social
innovation, entrepreneurship,
and start ups.
In partnership with local
partners, Ministry of Youth and
Ministry of Tourism and
Creative Economy.
Impact Accelerator program is
designed to provide social
entrepreneurs with access to
knowledge, networks, and
resources they need to grow
their businesses and their
impact.
The first batch is currently
rolling in partnership with 500
Startups.
A blended finance fund to
invest in companies that have
the intention to generate a
measurable and beneficial
social or environmental impact.
SDG Impact
Framework –
Islamic
Impact
Framework
Pipeline development Scale-up capital
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UNDP Strategy for Impact Investing in Indonesia
